The stock market is on a rip, due to Ben’s willingness to accommodate stock traders. But bond investors are being thrown a bone, too. This morning, across my four major accounts (representing about $800,000 face of agencies, munis, corporates, and sovereigns), I’m being marked up on everyone of them, and I hit a new equity high. Thank you, Ben.

The downside, of course, of his easy money, zero interest-rate policies is that those same high prices on bonds (and, hence, low yields) are making it very, very tough to put new money to work. So, that’s the trade-off. Them that’s already in the market --stocks, bonds, whatever-- are being taken care of quite nicely. Those still trying to get in (or, worse, massively sitting in cash) are getting killed.

Ultimately, of course, everyone will pay for Ben’s foolishness when the music stops and/or the punch bowl is taken away by exogenous forces (given that Ben lacks the Volcker-like courage to do it himself). Meanwhile, the 'risk-on' party continues, fueled by free money, hastening and making far worse the day of ultimate reckoning and raising this question:

Who, really, is Ben helping?

In the long run, it ain't you or me, and Ben is no friend to those who think that monetary conservatism is the foundation of genuine economic growth. Printing money, as he is doing, erodes the value of money already acquired and ultimately beggars everyone. That's Not A Good Thing, and Ben ain't nobody's friend, no matter the temporary, sugar high he is creating for us. I have no idea how to defend myself against his policies. But I'll be spending the weekend doing some serious thinking.

The latest round of QE announced by Bernanke yesterday has sparked growing controversy about how Fed policy has mainly helped the wealthiest Americans…. Economist Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy."

The reason is simple. QE drives up the prices of assets, especially financial assets. And most of the financial assets in America are owed by the wealthiest 5 percent of Americans. According to Fed data, the top 5 percent own 60 percent of the nation's individually held financial assets. They own 82 percent of the individually held stocks and more than 90 percent of the individually held bonds.

Put another way, most Americans have most of their wealth tied up in their houses (about 50 percent for most). For the top 5 percent, homes account for only 10 percent of wealth, while financial assets account for between one third and 40 percent.

Bernanke is obviously aware of this criticism, which is why the latest round of easing is focused on mortgages…. Of course, low interest rates also penalize savers, and the wealthy as a group have the largest savings pool in America. If you ask the wealthy today what their biggest investment challenge is, it's finding low-risk yield when CD's and Treasurys pay next to nothing.

But that hardly undoes the advantages of easing. According to Spectrem Group, the wealthy have only about 13 percent of their investible assets in cash, and the rest (more than 85 percent) in stocks, bonds, alternative investments and mutual funds - all of which have benefited from easing. http://finance.yahoo.com/news/does-quantitative-easing-mainl...

As a non-qualified investor and, obviously, not one of the ‘the rich’, I find it ironic how much I resemble that class. My paid-for house is only about 18% of my total net-worth, and my cash is less than 8% of my investment net-worth. In other words, whatever happens in financial markets, good or bad, impacts me hugely, which is why I favor bonds over stocks.

Yeah, stocks can offer a greater upside than bonds. But that upside comes at the cost of greater downsides. In 2008, I lost only about half of what the average stock investor did, but I more than matched them for gains in 2009 (I was up 33.6%) and even in 2010 (I was up another 19.9%). This year, however, though a bond investor’s gains will again be positive and near the historical high end, we’re going to come in second place to stocks, which prompts asking this perennial question:

So few post to this board who actually buy their own bonds. So it's good to hear from you.

When the sand hits the fan, diversification (as it's conventionally understood, i.e., spreading assets among things that have low correlations with each other) isn't going to offer protection, and it never has before, because when markets are under stress, correlations tend toward 1.0.

Instead of attempting to create robustness through diversification, protection from Bernanke might be obtained by fading him. That's what requires some thought (and a lot of discipline to implement).

When the sand hits the fan, diversification (as it's conventionally understood, i.e., spreading assets among things that have low correlations with each other) isn't going to offer protection

Charlie,

There are many ways to diversify that can offer protection if you want or need it... One way is to do it the way Taleb does it (many small highly leveraged bets).

I personally think that betting with the Fed (instead of against the Fed) will be much more rewarding in the next few years, and once you have made a good profit, then one can use the profit as insurance for whatever economic calamities one worries about.

I doubt anything worse than 2008/2009 is going to happen. As long as everyone worries about it, it ain’t going to happen! The really bad surprises occur “out of the blue” when nobody expects them (Black Swans).

On the bond topic, I’m still adding junk but it’s getting harder and harder and I’m taking greater risks for lower rewards (yields). I’m counting on Bennie & the Jets to keep the music playing!

There are many ways to diversify that can offer protection if you want or need it... One way is to do it the way Taleb does it (many small highly leveraged bets).The bets Taleb makes aren’t ‘highly leveraged’, but have asymmetrical payoffs. There’s a crucial difference. Supposedly, he runs 95% cash and uses the remainder to buy mis-priced, OTM options on which he bleeds until one plays off humongously. Financially, I’m in a position to play that game (or a variant, such as scaling commodities as described by Weist), but not emotionally. I don’t like draw-downs. I expect losses, and I’m comfortable with losing a steady 2%-5% of my positions to Chapter 11 filings. But more freaks me out. I need a casino in which I know I have an edge, and reward occurs frequently. Bonds, as I play the game, offer that, but nothing else I’ve looked at so far.

I personally think that betting with the Fed (instead of against the Fed) will be much more rewarding in the next few years, and once you have made a good profit, then one can use the profit as insurance for whatever economic calamities one worries about.I agree that’s the conventional wisdom. “Don’t fight the Fed.” But that saying arose in the days when Fed chairmen actually knew something worth knowing about economics, not just the fairy tale of Neo-Keynesism. Bernanke is hoping that his easy money policies will give the economy enough time to grow out of it problems. But the problems are fiscal, and until spending is less than revenues, the economy will struggle, if not collapse.

I doubt anything worse than 2008/2009 is going to happen. As long as everyone worries about it, it ain’t going to happen! The really bad surprises occur “out of the blue” when nobody expects them (Black Swans).But ‘everyone’ isn’t worried. Complacency is rampant. Even the gold bugs aren't as panicked as they should be.

Except for July, when I was fishing and camping with my daughter (and early April when I was playing pre-season boat mechanic at a friend's marina), the buying has been steady and on a pace to match what I've done previous years. YTD, I've spent $135k to buy $162 face, offering an average CY of 9.1% (your threshold for junk) and an average YTM of 13.5% (which is mine). So I'm making things happen rather than sit in cash. But it's not a sustainable gig at current prices, which is why I'm scrambling to find something else.

I didn't take a position in Calumet after all, for not (yet) being able to get it in size appropriate to my account. But the rest of the list is accurate and correctly marked-to-market as of last weekend.

Explanation: For scanning lists of 500 bonds at a time, I use a simplified set of formulas to estimate tax and inflation-adjusted YTMs. For more precise estimates of just a single bond, I'll drop the bond into the same spreadsheet I use to track my holdings. Generally, I flag with it with a color code so I'll know to remove it later if I don't buy it. In the case of Calumet, I hadn't yet pulled it. So it showed up when it shouldn't have.

It’s nice to exchange buy lists with you. Maybe we can both find a few more buy candidate from this. But first a few responses to your responses :)

The bets Taleb makes aren’t ‘highly leveraged’ I understand that Taleb does not risk much of his own capital, but as you say, he uses “out-of-the-money” options to obtain his leverage. I consider options a “highly-leveraged” derivative and this was what I was referring to.

But the problems are fiscal, and until spending is less than revenues, the economy will struggle, if not collapse. Actually a struggling economy forces the Fed to keep interest rates low and consequently causes upward pressure on most financial markets. This is why I am prepared to follow the “don’t fight the fed” mantra. A collapse is a different story, but I’m betting against it for now.

But ‘everyone’ isn’t worried. Complacency is rampant. Even the gold bugs aren't as panicked as they should be. I wasn’t talking about everyone. I read lots of doom-and-gloom scenarios... much more than past decades. Gold is close to it’s all time nominal high. I see lots of worry out there (Fiscal cliff, European crises, Iranian attack, etc).

Ok enough prophesying about the future... Here are my YTD purchases and returns so far:

YTD I’ve purchased $59,000 face at a cost of $48,017 (81.38) which is marked today at $50,662 (85.867).

I’m currently showing a 5.5% unrealized gain and a 9.2% total return on my 2012 purchases, CY of 10.3% and YTM of 13.1% on my cost. Weighted average of 7.2 years to maturity and single B rated portfolio.

I think I’m on target to meet my 10% return goal after defaults, calls and maturities (assuming no economic collapse).

In 2013 some of my prior year purchases will begin rolling-off, so I may need to be more aggressive in my purchase program.

But overall, I find Junk Bond investing much easier than equity investing. I think in general, most stocks are priced for an optimistic outcome, while most junk bonds are pricing in negative surprises. I attribute this to the fact that retail buyers are not a big factor in the day-to-day market. I have no problem with the high spreads if this is what is necessary to keep the retail buyers out and prices reasonable.

But overall, I find Junk Bond investing much easier than equity investing.

Howard,

On that, we do agree, and I'd broaden it further. Bond-investing, any kind, is an easy, easy gig. The downside, of course, is that rewards are commensurate with effort/risk, which is why bond returns are so modest compared to the money that stocks can offer. (But the downside of those fat stock gains is fat losses. So everything balances out in the end.)

Yes, bond spreads have been abusive. But you're right about how little retail participation there as been. If you pull T&S, you'll see very few small buy-side transactions, though a fair number of sell-side ones, as retail investors panic out of their positions, generally at steep discounts.

As for a collaborative searching effort, I have mixed feelings. I'd be happy to do it off-line with you. But for lots of reasons, I'm reluctant to do much in this forum by way of discussing specific issues except for illustrative purposes. In other words, I'm always willing to explore investment theory, which is what interests me most and which really is of most value to most people if only they realized it. Any idiot can offer buying suggestions, as TMF's writers endlessly prove. But few touts (stocks, bonds, or otherwise) take the time to think through the far more important things of how the risks of those buying suggestions would have to be managed and then attempt to guide their readers accordingly. ( Give a man a fish ... etc., etc.)

I've lost your email address. So I'll blind-copy you this post, and when you reply, I'll send you an updated version of my tracking spreadsheet.

Bond-investing, any kind, is an easy, easy gig. The downside, of course, is that rewards are commensurate with effort/risk, which is why bond returns are so modest compared to the money that stocks can offer.

The historical returns of Junk bonds are not so modest. According to the table below (from Fidelity), High Yield has outperformed most financial asset classes over the last 3, 5 and 10 year periods. And it has the added benefit of throwing off a significant income stream. That's why I'm here!

As for a collaborative searching effort, I have mixed feelings. No problem, I really didn’t mean collaborative searching (I’m not into group activities). I just thought something could be gained from comparing portfolios. But it’s probably best we do this offline because I don’t think too many others here are interested in individual issues and it’s quite a pain for me to reformat my spreadsheet data for listing on these boards.

FYI, I find that Fidelity quite often has a larger (and better) selection of bond offer prices compared to Etrade (although they don’t seem to list as many issues). I think FIDO also uses the Knight Bondpoint platform as well as Bonddesk. They have upgraded their search software over the past year and it is quite good now. And they have knowledgeable fixed income people to talk too. Fidelity is now my primary bond broker.

FYI, I find that Fidelity quite often has a larger (and better) selection of bond offer prices compared to Etrade (although they don’t seem to list as many issues). I think FIDO also uses the Knight Bondpoint platform as well as Bond DESK. They have upgraded their search software over the past year, and it is quite good now. And they have knowledgeable fixed-income people to talk too. Fidelity is now my primary bond broker.

WOW, that IS good news. I've got an account with Fido that I've been neglecting. I'll have to take another look.

When I said "modest", I was serious. Consider Graham's three categories of "Defensive", Enterprising", "Speculative" and match them up with the kind of money bonds each category would offer. Then run the same exercise with stocks. The embedded put that bonds offer has to be paid for. I'd price it at one Fib notch.

In other words, using investing methods that would qualify as "defensive", a stock investor should be pulling an average 8% out of his market, but a defensive bond investor won't make much more than 5%. Ditto the same sort of difference with Enterprising and Speculative. E.g., 13% for a junk bond investor is a reasonable benchmark. But 21% is more like it for a junk stock investor.

Also, don't just look at the past 40 years for estimating what junk bonds can offer. Go back a lot further and distinguish between the relatively recent phenomenon of "high-yields" that came to prominence with Milken and classic fixed-income value investing. The put function has to be paid for. That down-grades bond yields to "modest" at best.

Somewhere, I've got a spreadsheet in which I scaled out this stuff when I was trying to teach my daughter some of the basics of how to think about and manage risk. If I can find it, I'll post it.

regarding your respective buy lists on the year; my specific interests and strategies only pertain to corps. about 4 months or so ago, the number of corp bond total positions i have breached the four digits mark and i have had some issues in terms of scalability/size and the way i manage the portfolio.

back in 2008, more so 2009 i was focused on buying top tier brand names. took on pretty much all longer term positions. but then in 2010 discovered i did not want to give up that much yield/interest rate risk vs. comfort. not to mention as charlie will eloquently point out majority of those yields were dismal and would not give you a real rate of return. so reality is by the time 2011 rolled around i had been able to bail on some of these long term notes and make a few bucks as the premiums were increasing. eventually as yields kept coming down, i was able to unload everything. believe me, i give myself no credit for this. it was merely random luck and the events of QE 1, 2, etc.

now my portfolio is comprised of <10 year holdings. here is my specific question. when you say here is my buy list, do you guys ride this out or have these positions dynamically changed? my holdings list has changed dozens of times this year.

in other words due to the number of positions i have had to put on, of course some lemons will end up rearing their head. but instead of riding them into the ground i took advantage of the premium appreciation in other holdings to wipe out the loss on a particular position by selling both. so if i see a bond that was trading at 90 cents on the dollar and now is barely holding onto the lower mid $70 handle and i do not like what is happening to the company, i just cut it loose and then sell off the appropriate ratio in a winning position(s) that way bringing my actual principal investment to zero.

the goal is maximizing income stream while preserving principal. but what i forfeit is the fact that in this strategy by bailing on a potential lemon and selling a winning position i obviously no longer get the coupon payment off that winning position, so my income stream takes a hit.

it might just end up boiling down to glass half empty or half full, depending on how you want to look at it. my guess is maybe one or both of you, simply just factor a potential or realized loss/position into your income stream thus lowering your actual YTD rate of return.

I'm having a hard time understanding what you're asking. Also, if you're addressing your question(s) to both me and Howard (and Scott ought to be thrown into the mix, as well as others, such as Chris, who carry a lot of bonds), then you'll likely find that each of us worries about very different things and buys differently and sells differently. This is part of the attraction of individual bonds. They allow for so much flexibility. Total gains can be emphasized, and the money has been as good as that from stocks for a while now. Low-risk income can be emphasized, and the money has been very decent for quite a while now. So it isn't a matter of "half empty, half full" with choices making no material difference. Every choice has consequences, and every investor makes different ones, just because every investor's situation (means, needs, skills, and goals) will be different. But I'll lay out mine.

My goal is "capital-preservation", meaning, the true preservation of purchasing-power after taxes are paid and a realistic rate of inflation is subtracted, not the lie that is the CPI. Using a game-theoretic version of classic value-investing (as Graham lays out the latter), I buy across the yield-curve and across the credit-spectrum what seems like it should be bought. In other words, my investing-objective is the very conventional one of "multi-sector bond-investing", and managers like Fuss are my benchmarks and bogies. If I'm making the same money as the top 10% of fund managers in that asset-class, then I'm holding my own. Currently, not a penny of the money I make in bonds is needed to meet current expenses. OTOH, if I chose, I could support myself at least twice over from my investing alone. So, for me, investing is a game but with a very serious purpose. If I should ever need the money that investing can provide, I want the skills to be already in place. That's why I practice, practice, practice. But, also, I don't worry too much about daily, weekly, quarterly, yearly numbers. "They're good enough for the girls I go dancing with."

How do I intend to deal with the likely effects of Bernanke's recently-announced, QE Infinity? Mostly by ignoring it and him. Markets are going to do what they are going to do, and his policies will have less benefit than he hopes. Yes, the bond-shopping has gotten immensely tougher due to rising prices. But I still shop daily, and I still spend significant time building and refining my searching and vetting tools. I'm a bond-investor. That's not merely what I do. It's who I am, and I play the game very seriously until, of course, I find something better. LOL.

my guess is maybe one or both of you, simply just factor a potential or realized loss/position into your income stream thus lowering your actual YTD rate of return.

Yeah, that’s basically my strategy. As Charlie states, everyone has their own goals and objectives. My objective in buying individual bonds is to create an annuity-like income stream. I am prepared to risk capital in order to increase income. That’s why I stick with junk bonds. I’m basically a buy-and-hold investor from way back, so I buy bonds with the intention of holding to maturity.

I don’t consider myself smart enough to know if a company can hang-on until maturity when prices or earnings begin to deteriorate, so I’m prepared to go down with the ship. I try and keep my bond portfolio well diversified (although sometimes I break this rule). My target is a 10% nominal return over the life of the portfolio, so I try and average 13% YTM and hope not to lose more than 3% to defaults, reorgs and BKs. So far it has worked out very well. But the real test will come when the next recession hits. I figure if it occurs within the next few years, then I will probably miss my target. But if we can hold off for a while, I should make my target.

My objective in buying individual bonds is to create an annuity-like income stream. I am prepared to risk capital in order to increase income. That’s why I stick with junk bonds. I’m basically a buy-and-hold investor from way back, so I buy bonds with the intention of holding to maturity.

Howard,

I was surprised to see that our goals and results don't differ that much. Here's my quick summary of my current allocations:

In other words, scale out a Fib series and then match it up to each risk tranche with the understanding that only the middle three meet the the definition of investing. The other two really are other things.

Yes, for sure, when prime-debt is used as a proxy for making bets on the level/direction of interest-rates and traded aggressively, serious risks are accepted and serious rewards can be obtained. E.g., trading the long bond in '95 offered 55% gains. Trading it last year offered 35%. But if prime-debt is bought with the intention to hold it to maturity, then that stuff isn't materially different than CDs, which aren't materially different than 'cash'. Due to minimal default-risk, there is little possibility of upside gain. In fact, except in the rarest of circumstances, prime debt will never offer a real rate of return after taxes and inflation, and that isn't its purpose in a properly-constructed portfolio. It's there as ballast, to provide stability.

At the other end of the risk-spectrum are 'lottery tickets' whose occurrence isn't limited to the asset-class of bonds. E.g., most stock IPOs are lottery tickets. IPO buyers might hope to get an opening-day pop. But, on average, they are going to lose money over the next 1 to 5 years, as study after study confirms. Same-same with buying bonds that really are no more than lottery tickets. Occasionally, one might get a big pay-off. But, by an large, buying them provides no more than entertainment.

In his classic intro to value-investing, Graham argues that a self-identified "Defensive" investor is just going to get him or herself into trouble if he/she tries to reach for yield by straying into the 'Enterprising' category. The mind-set needed for success there is different. Also, he is adamant that very little money should be allocated to 'Speculative' ventures, 5%-10% of the portfolio at most, and that's a recommendation I fully accept.

Where confusions might arise is that I'm using the term 'Speculative' as well, but mean something a bit different than he does. What he calls 'Speculative' is what I call 'Lottery tickets'. What he calls 'Enterprising', I break into two categories. Where we do agree is 'Defensive'. But back in his day, 'Defensive bonds' paid much better than they do today, and Cash-management isn't something he talks much about at all. So that's a category I had to back into his trio as well.

But on the essentials, we're both on the same page. We're both trying to buy securities at a steep discount to their estimated, intrinsic value in order to create a margin of safety. The essential difference between 'Defensive' and 'Enterprising' is the amount of work/risk one is willing to undertake and the size of the reward one could reasonably expect from that effort. In today's bond-market, a self-identified 'Defensive' bond-investor will be doing good to make 5%. A competent, 'Enterprising' bond-investor is going to have a hard time making an average 8%, but that will characterize the average YTM of his/her existing portfolio. A junk-bond buyer won't have too much trouble making 13%. And as for lottery tickets, they are available, too.